Accounting and Regulation FMC Major 2024-2025 PDF

29/10/2024 INTRODUCTION Lecturers : Louis MANGENEY / Sofie VAN DER MEULEN 1 Why this reporting course in FMC major? CORPORATE REPORTING 2 2...

29/10/2024 INTRODUCTION Lecturers : Louis MANGENEY / Sofie VAN DER MEULEN 1 Why this reporting course in FMC major? CORPORATE REPORTING 2 2 1  29/10/2024 Why this reporting course in FMC major? Profit organizations how much profit? Non-profit organizations FINANCIAL does income cover all costs? NON-FINANCIAL REPORTING REPORTING or ACCOUNTING SUSTAINABILITY ACC ACCOUNTING & & REPORTING course REGULATION 3 (MS2) course (MS1) 3 Why this reporting course in FMC major? As a financial manager/controller, you will have to: manage the finances of an organization by monitoring its income and spending oversee accounting and processing tasks across income and expenditure (including payment runs) provides financial and administrative support to colleagues, clients and stakeholders of a business perform data analysis and advise senior managers on ideas to maximize profits … A good understanding of a firm’s financial reporting is essential !!! 4 4 2  29/10/2024 Course organisation Pre-readings for each session (except session 1) Each session will start with a short introduction of the topic, followed by practical cases which will be solved using your input. 5 5 Course organisation 9 sessions to cover the following topics: Intro+ Financial Reporting in IFRS Presentation of financial statements Reporting of Core Business Transactions Reporting for Non-Current Assets Provisions and Contingent Liabilities Reporting for leasing contracts Reporting for employee benefits Reporting for Equity and Financial Debt After year-end events Segment reporting 6 6 3  29/10/2024 Course Assessment Final grade consists of: 20% on following an online HBS module + passing MCQ in session 4 20% on in-class participation 60% final exam 7 7 TOPIC 1 : Fundamentals of Financial Reporting in IFRS 8 4  29/10/2024 Learning Objectives 1. Understand main objectives of IFRS and the importance of financial reporting standards in FS preparation and auditing 2. Understand the IASB governance and the IFRS Due Process and the importance of monitoring developments in financial reporting standards 3. Identify and illustrate fundamental and enhancing characteristics of financial information in IFRS 4. Define criterias for recognition of transactions, assets and liabilities in the financial reporting 9 9 Agenda - Introduction to Financial Reporting in IFRS - IFRS Due Process - IFRS Conceptual Framework - Key Concepts and definitions in IFRS 10 10 5  29/10/2024 Introduction to Financial Reporting in IFRS 11 11 Financial Reporting, what for ? “The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling, or holding equity and debt instruments, and providing or settling loans and other forms of credit.” Source : IFRS Conceptual Framework for Financial Reporting 12 12 6  29/10/2024 What are the objectives of Financial Reporting ? What do investors or lenders expect What information is important for when providing ressources to a profit- them in their assessment ? oriented company ? Amount ? Market price increase FUTURE NET Timing ? CASH INFLOWS Uncertainty ? Dividends FINANCIAL Depends on RETURNS MANAGEMENT Competencies ? Interest and Principal STEWARDSHIP Strategy ? payments Risk Management ? Vision ? What about Social and Financial Reporting enables Environmental Matters ? investors to assess financial position and performance of the entity 13 13 What does Financial Reporting encompass? Group Annual report* Corporate Profile Management Performance and Strategy report Risk Management Financial Governance Report reporting usually Consolidated Financial statements refers to Consolidated the annual Financial Statements Notes to the consolidated financial statements IFRS Statutory auditors’ report report*… * Or Universal Registration Parent Company Financial statements of the parent company Notes to the financial statements of the Local Document in Financial Statements parent company France Statutory auditors’ report GAAP 14 7  29/10/2024 Why IFRS ? Need for comparable “Standards that Financial Reporting bring transparency, accountability and efficiency to Need for reliable financial markets Financial Reporting around the world.” Globalization of capital (source : IFRS conceptual markets framework) Need for relevant Financial Reporting 15 15 What are the key objectives of IFRS ? 1 Transparency : Enhancing the international comparability and quality of financial information Accountability : Reducing the information gap between the 2 providers of capital and the people to whom they have entrusted their money 3 Efficiency : Helping investors to identify opportunities and risks across the world, thus improving capital allocation Fostering trust, growth and long-term financial stability in the global economy 16 16 8  29/10/2024 Standard-setting bodies vs Regulatory Authorities Regulatory Authorities Standard-setting Bodies SEC (US) – FSA (UK) – IASB – FASB AMF (France) Private sector Governmental entities Self-regulated Legal authority to organizations enforce requirements Issue standards based Exert controls over on collaboration of entities participating to experienced experts the capital markets 17 17 Application of IFRS in the world  Required in 144 juridictions (out of 166 profiled juridictions) for publicly listed companies (in July 2021) 18 18 9  29/10/2024 Application of IFRS in France IFRS for consolidated financial statements of listed groups on the EU stock markets IFRS as an option for consolidated financial statements of non-listed groups FRENCH GAAP for small and non-listed companies AND for individual (non-consolidated) financial statements of listed companies IFRS or US GAAP for French SEC registrants listed on the US stock markets 19 19 IFRS Due process and IASB Governance 20 20 10  29/10/2024 Transparency Accountability IFRS Due Process Fair and effective consultation 9 to 15 months 9 to 15 months Discussion ExposureDraft New Standard Paper For EU : Approval by Comment letters ARC* and Feedbacks Consultations European Parliament Consultative Group Research Program Effective implementation *ARC = Accounting Regulatory Committee VIDEO : https://www.ifrs.org/about-us/how-we-set-standards/ 21 21 Where to find “IFRS” Standard ? Website : www.ifrs.org Start your journey to IFRS! Register on IFRS.org to get free access to the standards 22 22 11  29/10/2024 The IFRS standards  Issued by the International Accounting Standard Board (IASB)  Principle based standards (vs Rule based standards for US GAAP)  A set of high quality accounting standards :  45 standards: 28 IAS (IAS 1 to IAS 41) + 17 IFRS (IFRS 1 to IFRS 17)  1 set of IFRS for SME (Small and Medium Equity)  28 interpretations: 20 IFRIC (IFRIC 1 to IFRIC 23) + 8 SIC (SIC 7 to SIC 32)  Defined for profit-oriented entities.  Convergence project between IFRS and US GAAP since 2002 23 23 RECENT DEVELOPMENT ! The International Sustainable Standard Board The IFRS Foundation trustees announced the formation of the ISSB at the 26th United Nations Conference of the Parties (COP26) in November 2021. In June 2023 the International Sustainability Standards Board (ISSB) issued its first two IFRS Sustainability Disclosure Standards = NON-FINANCIAL REPORTING IFRS S1 General Requirements for Disclosure of Sustainability- related Financial Information IFRS S2 Climate-related Disclosures. 24 24 12  29/10/2024 Where to find “IFRS S” Standard ? Website : www.ifrs.org 25 25 IFRS Conceptual Framework 26 13  29/10/2024 What is the Conceptual Framework? A practical tool that assists Board of IASB Preparers of FS All to develop Standards to develop consistent to understand and accounting policies interpret Standards Addresses fundamental issues What are assets, liabilities, equity, income and expenses What is the objective of What makes financial financial reporting? information useful? When should they be recognised? How should they be measured, presented and disclosed? 27 What is the objective of financial reporting? « The objective of financial statements is to provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity »  economic resources and claims  changes in these resources and claims from operations  changes from other events or transactions  impact of operating, investing, and financing activities on cash flows 28 28 14  29/10/2024 What makes financial information useful? Fundamental qualitative characteristics Relevance Faithful representation Information is relevant if it is capable of Information must faithfully represent the making a difference to the decisions made substance of what it purports to represent by users True & Fair View Enhancing characteristics Comparability Verifiability Timeliness Understandability Cost constraint (Cost/Benefit) 29 Clarifying aspects of faithful representation Does not allow for overstatement or understatement of assets, Complete, neutral, liabilities, income or expenses free of error Supports neutrality Arises when monetary amounts cannot be observed directly and need to be estimated (eg: fair value, expected credit loss) Measurement Does not prevent information from being useful uncertainty Estimates should be clearly and accurately described and explained Economic substance of the underlying economic phenomenon Substance over is normally the same as the legal form If not, need to represent the substance to provide faithful form representation 30 30 15  29/10/2024 Some practice… The following paragraphs talk about what principle respectively? 1. Which principle / guideline justifies a company violating an accounting principle because the amounts are insignificant? 2. In 2011, Gupps Alimentation decided to switch its inventory valuation method from weighted average to FIFO and added an extra note to its financial statements explaining the impact of this change. 3. Prior to IFRS, many national GAAP systems required accountants to apply some conservatism: when the accountant had to choose between two acceptable alternatives, the accountant needed to select the alternative that resulted in less profit, less asset amounts, or greater liability amounts. Conservatism is however incompatible with what IFRS principle? 31 31 Some practice… 4. Bailey Ltd closed its financial statements on 31st of December 2013. However, in February 2014 the company settles a long-lasting court case with a former employee out-of-court. In that case, IFRS requires the accountants of Bailey Ltd to go back to the 2013 financial statements and make the necessary adjustments. 5. Service firms typically pay a lot of attention to their reputation and consider it to be one of their ‘major assets’. However, reputation is typically not reported on the balance sheets. Which general principle prohibits this? 6. While some phenomena are inherently complex, accounts should always try to classify, characterize and present the information clearly and concisely. The problem with some of the major frauds in the last couple of years has been that they casted a seemingly simple phenomenon into a complicated structure, such as Enron with its special purpose entities. 32 32 16  29/10/2024 4 dimensions in Accounting 1 Recognition When to recognize an economic event (eg: sales, purchase, investment…) ? 4 2 Disclosure Measurement What to disclose about Economic How to measure or an economic transaction evaluate the financial transaction in Notes ? position resulting from this transaction (eg: 3 assets, liability) ? Important aspect of Presentation IFRS !! How to present an economic transaction (eg: ICS vs OCI…) ? 33 33 When to recognize an economic event ? Recognition criteria in ACCRUAL ACCOUNTING Probable event Measurable with reliability Probable that any future economic The item has a cost or value that can benefit associated with the item will be measured with reliability flow to or from the company There is no uncertainty about its existence Cost constraint If getting a reliable measure would costs too high, a company could justify not to record a given economic transaction 34 34 17  29/10/2024 Definition of basic elements RESOURCES = INVESTING SOURCES OF CAPITAL = FINANCING A present obligation of the A present economic resource entity to transfer an controlled by the entity as a LIABILITIES economic resource as a result of past events. result of past events. ASSETS The residual interest in A right that has the potential Shareholders’ the assets of the entity to produce economic benefits. EQUITY after deducting all its liabilities. 35 35 Illustrative examples Based on the definition of FS components and the recognition criteria, determine if the following situations should be recognized in the FS of the period ? 1. A positive article about the company is published in a famous newspapers. Sales’ Director is convinced that it will have a positive impact on sales and he would like to book it as an intangible asset based on the expected cash flows generated by this article. 2. An important litigation claim is opened by a client just before year-end. Client claims for 1 mio EUR. At the time of closing and issuing the FS, the company’s lawyers did not have time to evaluate the amount that the company might have to pay. 3. The company plans to restructure the organization next year but the plan has not yet been approved by the Board of Directors. Restructuration costs are evaluated at € 20 mios. 36 36 18  29/10/2024 Definition of basic elements EXPENSES INCOME Decrease in assets Increases in assets or increase in liabilities or decreases in liabilities that result in decreases in equity, that result in increases in equity, other than those relating to other than those relating to distributions to holders of dividends. contributions from holders. Question: A government gives a piece of land to a company at no charge. The company builds a factory on the land and agrees to employ a certain number of people at the factory for a certain period of time. Considering the definition of income in the Framework, do you think the fair value of the land is income to the company or is it a direct credit to equity? 37 37 Definition of basic elements Question: A government gives a piece of land to a company at no charge. The company builds a factory on the land and agrees to employ a certain number of people at the factory for a certain period of time. Considering the definition of income in the Framework, do you think the fair value of the land is income to the company or is it a direct credit to equity?  it is income because it increases the assets attributable to the shareholders of the company  grant comes with “strings attached” –the company must employ a certain number of people for a specified time (=cost). The grant is income to be matched against that cost.  government grants are like a “reverse income tax” When a company pays taxes, it recognises tax expense.  Grant is not equity as government is not an equity participant in the business - no shares and not entitled to dividends Government grants shall be recognised as income over the periods necessary to match them with the related costs on a systematic basis. 38 38 19  29/10/2024 How to measure/evaluate an economic position ? Historical cost measurement bases Current value measurement bases include amortised cost include fair value or value in use Selecting a measurement basis Relevance Faithful representation characteristics of the asset or liability measurement consistency contribution to future cash flows measurement certainty Information in both the statement of financial position and the statement(s) of financial performance Enhancing qualitative characteristics and cost constraint 39 39 Main differences with French Accounting Rules No documented conceptual framework French Commercial Code (Code de Commerce) as well as the General Chart of Accounts (PCG, Plan Comptable Général) sets out general principles to prepare FS. These principles are generally aligned with IFRS with the following exceptions: prudence in French accounting rules as opposed to neutrality in IFRS, obligation to account for transactions at their face value, prohibition to restate the opening balance sheet in French rules, i.e. the opening balance sheet for a given financial year must correspond to the closing balance sheet for the previous financial year, no "substance over form" principle in single/individual financial statements. This principle may apply in certain cases in consolidated financial statements. 40 40 20  29/10/2024 Exercises LET’S PRACTICE ! See Ieseg Online TOPIC 1 Exercises 1 to 4 41 41 APPENDIX 42 42 21  29/10/2024 Major steps in the IFRS process - 1973: Set-up of the International Accounting Standards Committee (IASC) by 9 professional accounting bodies including France - 2000 : IOSCO recommends use of international accounting standards for cross-border listings - 2001 : restructuration of the IASC into a full-time International Accounting Standards Board, overseen by independent Trustees => IAS become IFRS - 2005 : Adoption of IFRS by European Union for publicly listed companies - 2014-2016 : Publication of 3 major IFRS : IFRS 15 Revenue from Contracts with Customers, IFRS 9 Financial Instruments and IFRS 16 Leases - Coming: creating a new board that would develop a global baseline of sustainability-related disclosures. 43 43 IASB Statement of Mission ”Our mission is to develop IFRS Standards that bring transparency, accountability and efficiency to financial markets around the world. Our work serves the public interest by fostering trust, growth and long-term financial stability within the global economy.” Source : IFRS Foundation Constitution www.ifrs.org 44 44 22  29/10/2024 IASB three-tier structure Source: http://www.ifrs.org/About-us/Pages/How-we-are-structured.aspx 45 45 Due Process : IFRS 9 example In 2014 ! Source: site web de l’IFRS http://www.ifrs.org/Current-Projects/IASB-Projects/Financial-Instruments-A-Replacement-of-IAS-39- Financial-Instruments-Recognitio/Phase-I-Classification-and- 46 measurement/Pages/Phase-I-Classification-and-measurement.aspx 46 23